Unemployment insurance in crisis needs a solution

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Unemployment insurance, the California program that supports workers who lose their jobs due to layoffs, has been dysfunctional during the last two recessions. It’s time to fix it.

California’s recent political history is littered with episodes of short-sighted, irresponsible governance.

We’re witnessing an example right now — a decade-long neglect of the state’s water infrastructure that ill-prepares us to cope with both droughts and periodic floods.

Among the many other, if less spectacular, examples is a chronic crisis in unemployment insurance, the program designed to cushion the devastating impact on workers who lose their jobs and families during the state’s periodic recessions.

It’s a two-headed crisis. Not only is the program itself underfunded and unable to meet demand for benefits even in a slight economic downturn, but the Employment Development Department (EDD), which pays out these benefits, has proven incompetent.

Unemployment insurance and EDD worked pretty well until politicians tinkered with the system a few decades ago. The Legislature and then-Gov. Gray Davis, bowing to union pressure, increased benefits sharply but failed to raise payroll taxes for employers to pay them, fearing a backlash from business groups.

This left the state unemployment insurance fund unable to weather the major recession that hit the state later in the decade. The relatively paltry unemployment fund was quickly depleted, and the state borrowed about $10 billion from the federal government to cover the deficit.

To pay off the debt, federal officials raised payroll taxes on employers for the next decade. California politicians did nothing to prop up the fund, however, and when more than 2 million workers lost their jobs in 2020 due to factory closures during the COVID-19 pandemic, the unemployment fund quickly ran out of money.

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The state also borrowed again from the federal government, this time twice as much, almost $20 billion.

Not only was the state once again heavily indebted to Uncle Sam, but managing EDD’s benefits, both those from the state program and later a separate set of federal government benefits, became a management nightmare.

Qualified claimants often had to wait months for benefits and were spun around by EDD clerks while the agency paid out up to $30 billion in expanded federal benefits to fraudulent claimants, some of whom were behind bars in state prisons — a debacle that was never fully explained would.

It also left California with a huge debt, currently about $18 billion, and a depleted unemployment insurance fund.

Last year, when the state appeared to be running a budget surplus of nearly $100 billion, Newsom and the legislature approved $750 million to cut debt and another $500 million to ease the tax burden on employers to repay the debt.

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The large surplus has now turned into a multibillion-dollar deficit, and the 2023-24 budget Newsom proposed last month eliminates both payments. Meanwhile, even without a recession, the unemployment insurance fund is hardly able to make the ongoing benefit payments.

According to the most recent EDD report, payroll taxes generate about $6 billion a year in revenue for the fund, while non-recession benefits total about $5 billion. As a result, it can’t build the reserves needed to weather even a mild recession — which many economists believe is likely to be the result of the Federal Reserve System raising interest rates to fight inflation.

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This is a serious issue that involves not only immense sums of money but also the lives of employers, especially small businesses, and laid-off workers, like the thousands of workers in Silicon Valley who are now losing their jobs.

We have had clear evidence over the past two decades that the system is not working as it should. It’s up to Newsom and the legislature to fix the problem.